The world is still firmly in the grip of the Covid-19 pandemic. Many people and businesses fear a second lockdown. This is noticeable in the real estate industry and among investors. The crisis has led to a significant shift in real estate investors’ investment rationales. ‘Lower risk, lower return’ is the mantra of the moment, as the investment climate study carried out by Union Investment shows.
Between May and July, market research institute Ipsos conducted interviews with 150 property companies and institutional real estate investors in Germany, France and the UK. Of those surveyed, 58% are pursuing such a strategy. The figure was just 35% prior to the virus outbreak. The shift is especially pronounced in the UK, where security is the main investment motive for 79% of respondents, up from 50% before the pandemic. Nonetheless, there is no general reluctance to invest. Only 5% of European investors intend to avoid all investment in real estate.
The Covid-19 crisis has triggered a move towards climate-friendly investment, with 54% of respondents planning to invest more in this segment. Nearly half (49%) are aiming to acquire more core properties (commercial, industrial, and multi-family real estate), while 42% intend to invest more in their own country. This change in emphasis is particularly strong in France, where 71% of investors are planning climate-friendly investment, 65% intend to buy core properties and 59% are choosing to invest increasingly in their own country.
The UK, in contrast, has seen a less marked adjustment in investment focus. Our study found that only 31% of respondents intend to focus more on climate friendliness, 36% on core real estate and a mere 14% plan more domestic investment. However, 43% of UK investors intend to invest more heavily in other property types. Overall, 41% of the institutional investors covered by the survey plan to do likewise.
European investors are seeking stabilisers in the crisis. Healthcare and logistics are the preferred asset classes; 65% of respondents expect that more capital will be channelled into these categories. Both these property types are less prone to crises and help to stabilise cash flow. Nevertheless, the residential asset class also remains attractive: 55% of survey participants anticipate rising inflows into this segment.
When asked which real estate market will recover fastest from the pandemic, the majority of European real estate investors (57%) believe the German market to lead the way. In particular, respondents rate the Berlin and Frankfurt markets highly: 42% say the German capital will make a rapid recovery, while 38% cite Frankfurt. Germany benefits from its economic strength and the government’s successful crisis management to date. Berlin and Frankfurt, like other German locations, have a modest pipeline of new office space, giving them a good chance of returning to normal faster.
The real estate markets in Paris (30% of respondents), London (29%) and Stockholm (23%) are also considered to have good chances of recovery. The study indicates that the markets in Milan (55% of respondents) and Madrid (47%) are likely to struggle with the consequences of the pandemic for longer.
Germany is the anchor of stability in the real estate investment climate index. Compared to the last survey six months ago, the indicator for Germany has fallen only slightly from 63.2 to 62.6 points. The situation is significantly different in France (down 9.5 points) and the UK (down 6.1 points). In both countries, this is due to a change in location factors and expectations. In France, the location factors sub-index declined by 13.1 points, while the expectations sub-index fell by 20 points. The UK presents a similar picture.
Olaf Janssen is Head of Real Estate Research at Union Investment Real Estate GmbH. This is an edited version of article originally published by Union Investment.